Through the first quarter of 2021, the global economy and the M&A landscape continued to show signs of recovery.

Several months of pent-up seller interest led the charge in an uptick in deal volume toward the end of 2020, with valuation multiples making their way back toward pre-pandemic levels. Successful vaccine rollouts, relaxed COVID-19 restrictions, improved consumer sentiment and a strengthening job market have contributed to recent economic and M&A market rebounds.

While M&A activity for the year ended 2020 finished below historic levels, a strong Q1 2021 performance indicates a surge in M&A activity to come for the rest of 2021.

M&A activity

As COVID-19 vaccine production and distribution efforts continue to exceed expectations, there is an increasing feeling of certainty coming back into the marketplace for both buyers and sellers.

During the initial phases of the pandemic, financial sponsors increased the use of add-on acquisitions to mitigate risk, and we saw this trend continue in Q1 2021. Add-on acquisitions, which were valued approximately 0.3x lower than platform acquisitions, accounted for roughly 30% of acquisitions in 2020 and Q1 2021, compared to 21% and 27% in 2018 and 2019, respectively, according to GF Data®.

PitchBook reports that the North American deal market closed 4,078 deals in Q1 2021, accounting for $493.4 billion in value. This represents a YoY increase of 17.1% in deal volume and 14.4% in deal value.

In aggregate, middle market valuations dipped slightly from 6.9x EBITDA in Q4 2020 to 6.8x EBITDA in Q1 2021, as reported by GF Data in its quarterly M&A report. However, drilling down by enterprise value ranges, we see that valuations increased in all areas except for the $50-$100 million range.

Consistent with previous quarters, size continued to be a significant driver of valuation. Transactions in the $10-$25 million range averaged a 6.0x EBITDA multiple, and deals in the $100-$250 million range averaged a multiple of 7.9x in Q1 2021, both of which were up slightly compared to Q4 2020.

Four business categories — manufacturing, business services, healthcare services and distribution — accounted for approximately 80% of deal volume for Q1 2021, with valuation multiples ranging from 6.3x-6.9x EBITDA.

Total debt multiples have been steadily rising since the beginning of the COVID-19 pandemic, increasing from 3.3x EBITDA in Q2 2020 to 4.0x in Q1 2021. This trend is consistent with senior debt multiples, which are up from 2.7x in Q2 2020 to 3.7x in Q1 2021. This continued expansion of senior debt and simultaneous contraction of subordinated debt indicates that senior lenders are returning to normal pre-pandemic levels of selectiveness.

Continuing to navigate the pandemic in 2021

Although deal activity is picking back up, we are still operating in an uncertain M&A environment. As evidenced by the increase in deal volume towards the end of 2020 and into Q1 2021, new deals are still getting done despite the uncertainty in the marketplace. Deals are being launched on a selective basis, and many in-process deals continue to move forward, with careful consideration being given to timing, process design, deal structure and valuation expectations.

Wipfli Corporate Finance Advisors anticipates that valuations and deal activity will continue to move toward pre-pandemic levels as we continue through Q2 2021. With that in mind, preparation for sale should begin now. Buyers will look through the financial impact of COVID-19 and will focus on the ability to rebound.

Additionally, buyers will become more aggressive, as there is too much capital needing to be invested for financial buyers to stay on the sidelines for very long. Markets are working toward an equilibrium, and a new “normal” is beginning to emerge. WCF stands by, ready to help clients navigate this turbulence.